Commercial Mortgages: Capital is flowing into real estate

Bono probably wasn't thinking about the rebirth of commercial real estate when he sang "After the flood all the colors came out" in U2's "Beautiful Day," but the song evokes the budding optimism that can be felt in the industry today.

After four tough years of battles with lenders, tenants and investors, commercial real estate developers seem poised to move beyond their recent past and look toward the future.

What is the reason for this outlook? In a word: capital.

Capital is the life blood of real estate. When it's flowing, the industry blossoms, and when it's not, the industry shrivels.

For the better part of four years, capital has been receding from real estate (and other assets); now it is flowing back in.

Bill Gross, the famed head of PIMCO, the world's largest bond investor, recently released an investment outlook that is a bit scary for investors because Gross predicts that real growth will be severely limited by excessive fiscal deficits and high debt-to-gross domestic product levels.

The good news: Investment real estate, in his view, is one asset class that has the potential to deliver the most return with the least amount of risk. The caveat is that the assets shouldn't be "burdened by excessive debt and subject to future haircuts."

Of course, savvy investors have already come to the same conclusion and have been running to so-called "fortress" commercial real estate for several years.

That is, they have been investing in the top buildings in the top markets and using low leverage in their purchases. The thinking is that as inflation kicks in, rents will go up and you will have good returns that are a hedge against inflation.

The only problem with the thinking is that when everyone is trying to buy the best building in the best cities in the country, it is hard to get a price that creates attractive returns.

No matter how attractive a building, every building has a price that is unattractive. That is why investors are now looking beyond "fortress" real estate and exploring secondary markets.

For instance, February sales volume fell year-over-year in Boston, Los Angeles, San Francisco and Washington, but rose in Chicago, Detroit and Seattle, according to research from CoStar Group, a Washington-based real estate information provider.

While one month is hardly a trend, it shows an expected progression in the recovery and has industry participants in smaller cities feeling more upbeat.

A huge help in this trend of capital turning to secondary markets is the availability of debt.
With commercial mortgage-backed security lenders more active and extending their success of the past few months, more money is flowing to a wider range of real estate.

Pricing for five- and 10-year mortgages is now in the 4 to 4.85 percent range, respectively, for solid non-recourse mortgages from life insurance companies and Wall Street conduits (commercial mortgage-backed security lenders), according to the John B. Levy & Co. National Mortgage survey.
Lower leverage deals are priced lower and smaller loans financed with community banks are priced higher.

Rates on commercial mortgages are higher this month than they were last month primarily because yields on U.S. Treasuries have increased significantly. This has occurred because investors have a little more faith in the economy and are willing to look elsewhere for higher returns.

The same is occurring in commercial real estate.

Investors are moving away from "fortress" real estate and into secondary markets to get better returns.
Richmond should be a direct beneficiary in this movement and has already benefited from an increase in debt capital availability.

The question is how long will prices remain attractive while debt remains cheap? As Bono would say, "It's a beautiful day, don't let it get away."

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com.

Article from http://www2.timesdispatch.com/business/2012/apr/09/tdmbiz06-commercial-mortgages-capital-is-flowing-i-ar-1827844/

Invest in assured returns projects at your own risk

You can’t miss the billboards, the full-page advertisements, the television commercials offering you a juicy 12% per annum “assured” return on an upcoming residential or a commercial project. At a time when equity is volatile and high inflation is reducing the real return on deposits, the offer of a 12% return on a long-term appreciating asset like real estate sounds too good to pass up. The golden rule of investing is to question any deal that looks too good to be true; it often is too good to be true.

How do assured returns schemes work?
You buy a property outright (even when the completion of the construction is two or three years away) with either your own funds or a loan from a bank. Say, you pay Rs1 crore for the flat. During the construction period, you get Rs1 lakh a month (12% per annum of Rs1 crore) through post-dated cheques the builder issues you.

Once you get the possession of the flat, you can either exit the project or continue with the agreement, but the terms could change as the property will be leased out to a tenant and the developer may share the rent with you. There is no lock-in period for the agreement; it is usually for the next two, three, five or 10 years after possession.

SOUNDS GREAT. BUT LET’S ASK SOME QUESTIONS
From where is the developer giving a 12% return?

When a deal looks so good, we need to begin asking questions. The yield from residential housing is usually in the band of 2-6%. That means the annual rent as a percentage of the capital value is about 4%. A Rs1 crore property should get you an annual rental of about Rs4 lakh a year or Rs33,000 a month. So how is it that the builder is offering you a return that is three times the rental? There is obviously some other story at play.
Data from Kotak Securities Ltd, a brokerage house, shows that absorption levels in projects have deteriorated and there is an increase in inventory across prime real estate markets.

The excess supply is making some developers less creditworthy in the eyes of the banks and private equity (PE) that traditionally fund the business. This is forcing developers to turn to various other funding options, such as getting hold of bank finance but routing it through you, the buyer, because you get the loan at much lower rates. Says Gulam Zia, national director (research and advisory services), Knight Frank India, a property consultant firm, “This is a measure taken in desperation to raise cheap money from investors and buyers. If the same developer looks for a financing option from banks, he would get the money at a high cost (at a rate of 14-15%). Thus for him, getting money for 10-12% means cheaper financing.”

What is the guarantee that the post-dated cheques will not bounce?

Says Omaxe Ltd’s spokesperson, “In the past, it has never happened that any cheque has bounced from any developer.” The company that is running the scheme at one of its commercial projects at Greater Noida accepts payment from buyers in the company’s account, he adds.
However, it is worth mentioning that banks sometimes lend money to real estate developers by creating an escrow account. The receivables from customers also come in this account. The deposits made in this is strictly meant for the construction of the particular project. Says Ramesh Nair, managing director (west), Jones Lang LaSalle India, an international property consultant firm, “There is no such mandatory rule for creating an escrow account. However, this has been discussed in the proposed real estate regulatory bill.”
So is there a regulator overseeing this promise?

Seems not. In an email response to our query, the spokesperson of Reserve Bank of India said, “We do not regulate real estate firms so I won’t be able to respond to the queries.”
Capital markets regulator, Securities and Exchange Board of India (Sebi), too, does not regulate real estate projects, but has regulatory oversight over the collective investment schemes around real estate like PE funds.

India does not have a real estate regulator in place as yet. So you are believing the good intentions of the developer and his ability to keep the promise of payment. Questions Anurag Mathur, managing director, Cushman and Wakefield India, an international property consultant firm: “These are basically non-secure schemes. If there is some default from the developers’ side, what is the recourse for investors in these schemes?”

Unless you are a speculator and have the money, legal help and stomach for such deals, stay away from the assured returns projects. They come in with very high-risk (almost 90% of the cost is paid upfront to the developer) and high-return category of assets. There is an investor for whom these will work, but if you are the average salary-earning and EMI-paying homebuyer, stay away.

Illustrations by Jayachandran/Mint

devesh@livemint.com

Article from http://www.livemint.com/2012/04/08205625/Invest-in-assured-returns-proj.html

Why You ought to Read Real Estate Investment Guides?

Real estate Investing has stopped being the special past time of wealthy businessmen. In today's globe real-estate has changed into a widespread monetary motion for people from all walks of life. This trend will more than likely to continue to do will into the predictable future. This change is because of elimination and concentration on company pension plans. Personal investing guide has replaced these plans as the preferred approach to plan for retirement

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Taken from http://www.orato.com/business-career/why-you-ought-to-read-real-estate

Urban myths of real estate

A press release I received from realestate.com.au kindly volunteered to expose "four of the biggest myths preventing consumers from entering the property market."

I'd like to do a bit of myth busting myself, including the biggest myth - that you can rely on the vast majority of property advice you hear.

The vast bulk of property commentary comes from people who have a very direct interest in seeing property prices and turnover remain high.

The realestate.com.au release is a case in point: this company makes its money through the volume of listings on its website and the number of real estate agents subscribing - when property markets are strong, more activity equals a higher profit.

It's no surprise then that the press release the company puts out says autumn is a great time to buy or sell property - as far as realestate.com.au is concerned any time of year would be a great time to buy or sell, in fact it would be best for the company if everyone just kept buying and selling all the time.
The company says its internal data shows March and May were the most popular months of the year for new property listings.

This would be good for buyers - more properties to choose from and the chance to bargain down prices - except that May also had the largest number of potential buyers browsing, which means more competition and other buyers bidding up prices.

Realestate.com.au's general manager of brand, communication and insight, Joanne Whyte, says this "provides a terrific opportunity for buyers and sellers".

While this may be true in terms of choice of properties, it certainly can't be true in terms of price.
Real estate is a zero-sum game, if the buyer pays more the seller wins and vice versa - there is no such thing as a time that's good for both buyers and sellers.

If you're a buyer, you want lots of properties on the market and not many other people buying, if you're a seller you want the opposite.

Buy in Bendigo

The second myth that realestate.com.au's release seeks to bust is that first home buyers are being forced out of the market by high prices.

It says there were 23,000 more properties listed at $500,000 or less on its website in 2011 than the previous year.

Bureau of Statistics figures put average full-time earnings at $72,000 a year (including overtime and penalties) - even before tax that means a $500,000 property is nearly seven times average earnings.
Even with a $100,000 deposit saved, your $400,000 mortgage would cost $2,956 per month at a 7.5 per cent interest rate - that's almost half your pre-tax earnings, which is hardly affordable.

Most potential first home buyers are also likely to earn less than the average wage, given they tend to be younger and at an earlier lower-paid stage in their careers.

It is also worth remembering that 7.5 per cent is around what the Reserve Bank has labelled average interest rates, meaning that rates are likely to be above this level for half the life of your loan.
So the real message is actually that most single prospective home buyers are being kept out of the market, or taking on dangerously unsustainable levels of debt to get into it.

But don't be disheartened. The release quotes property expert Margaret Lomas saying:

"While many of the more exclusive suburbs of capital cities are indeed unaffordable to the first home buyer, considerable affordability can be found in outer suburbs with excellent infrastructure and in larger regional areas which offer diverse employment opportunities and an excellent lifestyle."

The note to editors says 'affordable outer suburbs' referenced in the release include, amongst others: Bathurst, Orange and Nowra in NSW; Toowoomba and Townsville in Queensland; and Geelong, Bendigo and Ballarat in Victoria. That's one hell of a commute if your job is in the state capital, as most are.

To be fair, there were some suburbs listed that are within the urban area such as Mt Druitt in Sydney, but I think most Sydneysiders would agree that anything approaching $500,000 for a place in Mt Druitt is getting more than a bit steep (that includes a colleague of mine who is from that suburb).

'Most affordable in a decade'

Margaret Lomas also assures Australians that housing is the most affordable it has been in a decade:

"From a peak of 34 per cent of the average household income in 2010, average mortgage payments on the median priced home have declined to 32 per cent and are expected to fall beneath the long term average of 30 per cent by early next year."

It is true that home prices fell last year, while incomes have continued rising, thus making housing slightly more affordable.

However, the biggest factor in this improved affordability has been lower interest rates, and there is every chance that the global repricing of financial risk after the GFC will see a structurally higher level of average interest rates develop - we are already seeing this in the banks' independent interest rate rises.

Ignoring the affordability effect of interest rates (which could vary widely over the life of a 25 or 30-year loan), figures compiled by Steve Keen (an associate professor of economics at UWS and well known Australian housing market critic) from RBA and ABS data show the ratio of house prices to household disposable income has increased two-and-a-half fold since 1970.
Most of that increase has occurred since the early 2000s, with the ratio doubling since the late 1990s despite more households now having two income earners than previously (read more here).

And it's not only Steve Keen that thinks Australian homes are overvalued.

Demographia does an annual survey of house prices to incomes in a range of global cities - Sydney ranked third-least affordable, with other Australian cities also dominating the top of the list.
Morgan Stanley global strategist Gerard Minack in 2010 estimated Australia's housing as about 40 per cent more expensive than nations such as the UK, Canada and New Zealand.

Late last year The Economist magazine estimated Australia's housing market was more than 25 per cent overvalued, and even went as far as saying that Australian housing looked more overvalued than America's at the peak of its bubble.

AMP Capital Investors chief economist Shane Oliver wrote in a note in May last year that Australian house prices are overvalued, and at that time were around 25 per cent above their long-term trend.
In that same report, Shane Oliver cited figures from the OECD showing the ratio of Australian home prices to incomes as being 34 per cent above its long-term average, with the ratio of house prices to rents being 50 per cent higher than where history suggests it usually is.

However, he concluded there was no bubble because the market was in the process of deflating rather than racing ahead, and because supply shortages would provide a floor under prices. The Reserve Bank has a similar assessment of the market.

Property interests

While the above sources have their professional reputations at stake when discussing the Australian housing market, most of them don't have any more skin in the game than your average home owner or small-scale investment property owner.

Compare that to the institutions that have a habit of talking up the property market and encouraging people to buy.

You have realestate.com.au which, as I outlined above, makes its money from more property transactions taking place.

You also have property experts, in the business of providing advice to people on buying investment property. Less people interested in buying investment property means less potential business.
Real estate agents are no friends of the buyer either: for most of them, the higher the sale price the higher their commissions. They also rely on transaction volumes, so it takes a pretty honest agent to tell you it's a bad time to sell or buy.

Finally, even the major newspapers have skin in the property game.

News Limited owns more than 60 per cent of realestate.com.au and Fairfax runs its main rival Domain.

Property advertising is one of the high value classifieds markets still dominated by the traditional media companies (through their online and print interests) and real estate downturns bite hard on the bottom line.

That's not to say the news journalists from those companies are necessarily affected by those interests (after all, most of us now don't earn enough income to be property owners, let alone investors!), but the specialist property sections rely on agent ads to stay afloat, so I wouldn't expect too much real estate negativity from that source.

In short, just as you wouldn't necessarily take a buy recommendation from a broker who owned a lot of stock in a company and was talking up its price, one has to be careful of property pundits keen to play down talk of home price falls.

Michael Janda is the ABC's Online Business Reporter. View his full profile here.

Article from http://www.abc.net.au/news/2012-03-20/janda-urban-myths/3900906

Real estate property Investing in Rental Attributes

Performing with rental attributes isn’t just about as glamorous and doesn’t supply the virtually instant revenue that flipping houses may well but it really is likewise a fantastic and very valid method of warehouse space for lease investing that will create a steady revenue over time in the event you method adequately. Rental properties are in need now a lot more than at any time with a lot of folks going into foreclosure and dropping the properties they have worked really hard to create for his or her family members. Because of this rental attributes really are a good issue to individual at the moment, specifically people who are relatives residences.

There are many strategies wherein anyone will make a dwelling in relation to commercial real estate investing a few of them have far more dangers than others. It goes without having declaring that those that carry the greatest hazards are frequently the very real-estate expense methods together with the maximum potential revenue but gradual and steady, in many scenarios, wins the race. Flipping houses is in the information a lot since a lot of fortunes are actually built carrying out this-more than a few are already missing during this enterprise in addition but all those don’t make the news close to as usually.


There are several good reasons that people lease and although there are some risks involved when renting qualities, the hazards are significantly lessen as opposed to risks involved with flipping or pre-construction financial investment endeavors. There are some things you ought to look at when paying for a house for that sake of renting nevertheless to be able to help make a intelligent and long long lasting final decision in your property financial investment.

First, only invest in rental qualities in parts that individuals would like to live in. It may well be accurate that you simply should buy property low cost inside a several pretty run down sections of city however it is uncertain which you will switch those properties into worthwhile rental models. It can be greatest to shell out somewhat more for just a additional desirable tackle for renters. You’ll find that your properties are inhabited additional often, which can make you extra funds from the long run.

Second, concentrate for the sorts of people during the region and invest in rentals accordingly. It’s pretty doable to turn significant residences into many more compact apartment models (according to local zoning regulations) which can be perfect for university pupils. You need to do not would like to try this however in a location that is definitely geared in the direction of family members homes and wouldn’t be welcoming or tolerant of faculty students. Layout the rentals based on the marketplace you will be trying to appeal to.

Third, will not be greedy. The intention of proudly owning office space is needless to say, to produce revenue. At the same time if your price your qualities far too significant you’ll find which they sit vacant additional often than not. Each and every month that your property is empty is usually a thirty day period which you are not earning income on that property at finest in addition to a month that you are shedding money at worst.

Fourth, know the marketplace. Research the area market place for buying real estate and renting real estate. This tends to help with several points, not the least of which can be determining whether or not any presented property will make a gorgeous rental unit. One more issue it should allow you to determine is exactly how much hire the units that you are looking at can provide in month soon after month.

Lastly, when leasing qualities you have to hold your eye about the long-term ambitions instead than shortsighted aims. Property rental is really a marathon alternatively than the usual sprint with all the finest earnings coming with the stop. You should pay out as little fascination within the residence as feasible and pay the residence off as promptly as possible as a way to realize the utmost earnings likely and purchase new attributes. The real funds when renting attributes being a real-estate financial investment is not in leasing out one or two models but 20 or 30. The more rental qualities you very own the more cash you stand for making from owning them.

Written by the Realtown Properties Team

Article from http://www.hreality.com/real-estate-property-investing-in-rental-attributes/

U.S. Investors Commit Nearly $1 Billion To Brazilian Real Estate In New Fund

It wasn’t that hard to convince 24 investors, most of them institutions, to commit a total $810.2 million to Brazilian real estate projects in São Paulo and Rio de Janeiro states.  With that under their belts, GTIS Partners, a global real estate investment firm, just raised the largest amount of funding by any foreigners buying Brazilian properties.

GTIS Partners in New York City closed its newly created GTIS Brazil Real Estate Fund II on February 24. Many of the investors are the same ones that bought into their first fund, the GTIS Brazil Real Estate Fund I, which managed to raise $510 million in the crisis years of 2008-2009.  All told, GTIS has raised around $2.3 billion in private equity capital since its inception in 2005.

As a result, the New Yorkers now run the largest real estate dedicated private equity fund in Brazil.

Josh Pristaw, Senior Managing Director of GTIS said, “Real estate investment opportunities that we are focused on in Brazil are also being driven by many macro drivers in Brazil including the upcoming 2014 World Cup and 2016 Summer Olympics.”

So far, the fund has spent about 30% of those commitments on a warehouse and residential project in São Paulo and one brand new commercial property in Rio de Janeiro (pictured).  It’s got about $250 million more worth of projects on the drawing board, and still under negotiations.

“It’s mostly all new construction,” said Tom Shapiro, president and founder of GTIS. “Investors are sold on the cap rate. Plus margins on selling the properties are still very good. You will get more than what you put into Brazilian real estate,” he said. The cap rate, or capitalization rate, is used to estimate an investor’s potential return by dividing the income the property will generate after fixed costs and variable costs by the total value of the property. Shapiro put the cap rate above 16%.

Leases in Brazil are linked to the core inflation index every three years. There is also low vacancy rates in Brazil as the country continues to grow up from its humble days as a poor country. World class cities like São Paulo still don’t have a lot of class A commercial buildings like the U.S., Europe or even Asia.  Smaller sections in São Paulo have steel and glass structures, but most of Brazilian buildings are built brick by brick. Companies moving to Brazil, or upgrading, are going to want newer architecture.

GTIS recently acquired a couple of sites located side by side near Rio’s port and will build around 400,000 square feet of new class A office space starting next year.   The building is expected to cost around $150 million.

Shapiro’s fund is closed to investors.

Retail investors interested in Brazilian real estate don’t have a lot of products to chose from.  Brazilian residential builder Gafisa (GFA) is liquid, and highly volatile. Other residential names like PDG Realty or commercial properties like BR Malls are only listed on the BM&F Bovespa exchange.  International real estate mutual funds like Alpine International Real Estate (EGLRX) are heavily weighted towards Brazilian developers and real estate investment trusts but not a pure play Brazil fund.

Article from http://www.forbes.com/sites/kenrapoza/2012/03/21/u-s-investors-commit-nearly-1-billion-to-brazilian-real-estate-in-new-fund/

Americas expected to lead global property investment market recovery

Analysts expect a 20% increase in global property investment markets in the second half of 2012 led by the Americas and driven by increased confidence and a release of pent up investor and tenant demand.

A return to better economic growth will be the key to the strength of the recovery, according to Cushman & Wakefield’s latest research report, the International Investment Atlas 2012.




‘We are witnessing increased risk tolerance in the securities and real estate markets. As the economic news firms, particularly in the sovereign debt and banking markets, these trends are expected to accelerate in the second half of the year,’ said Glenn Rufrano, global president and chief executive officer of Cushman & Wakefield.

Cushman & Wakefield anticipate volumes for the year to be little changed overall on 2011, at US$710 to 720 billion but within this total, a potential 20% increase between the first and second halves of the year is expected, with activity picking up due to stronger demand as well as increased investment supply resulting from bank loan sales and recapitalizations.

According to Greg Vorwaller, head of global Capital Markets at Cushman & Wakefield, sustained job growth will be a vital boost. ‘A rally in sentiment should be enough to trigger a steady release of pent up occupier demand for effective, modern space as stalled business plans are put back into action, helping investment, banking and development markets,’ he explained.

‘However even if confidence stays low or a new crisis emerges, property is still going to remain high on the  agenda even as tenant demand falls for investors as they look for secure incomes and for occupiers as they look to cut costs and utilise their asset base to its fullest extent,’ he added.

David Hutchings, head of European research at Cushman & Wakefield, believes that London will continue to stand out due to the sheer depth of its market as well as the long term growth it offers.
Investors are also set to look more widely for opportunities this year, some taking on more risk, other re-evaluating what risks they are ready to face.  In fact a new hierarchy of targets is starting to emerge as investors look beyond the region or country that a market lies in to better understand its true risks and growth potential.

Vorwaller said that the Americas look likely to see the fastest growth in investment activity again this year, focussed on the US. ‘However for those willing to look behind the headlines, Mexico presents some compelling opportunities in prime retail, office and industrial for premium risk adjusted yields. The industrial sector in particular should benefit from the on-shoring and near-shoring of manufacturing,’ he explained.

‘Brazil remains a place where truly global investors must take a position given the relative growth of the economy and absolute growth of its middle class. Industrial and retail continue to offer attractive opportunities for those seeking stable growth with capital appreciation in mind, providing tax and currency risks are accounted for,’ he added.

In the US, beyond prime assets in prime markets, investors should begin to focus on prime assets in secondary cities that have historically performed well on a supply/demand basis through economic cycles, according to the firm.

Strong interest is expected to continue in emerging markets. Last year Asia saw a 42% increase in industrial investment and a 26% rise for retail, with no significant change for offices or hotels. These trends will continue in 2012 with a focus on Japan, Hong Kong and Singapore for industrial, mainly in logistics, according to Cushman & Wakefield.

‘While we expect the first half of 2012 to continue last year's trend of a move back to core product in gateway markets, from mid year on we anticipate an increase in activity in the emerging markets,’ said John Stinson, head of Asia Pacific Capital Markets, Cushman & Wakefield.

‘Strong local conditions, unprecedented numbers of opportunities and favourable investor sentiment will see more international capital deployed in India for example, initially in residential and then in office products in Bangalore and around NCR. In China, the global investor community is now differentiating and seeing markets within markets, with the key cities of Shanghai and Beijing being the pick for office exposure. Strong turnover will continue to drive excellent fundamentals for investment in mid to high end retail malls in either high street Tier 1 locations or strong Tier 2 cities such as Chengdu,’ he added.

In Europe, the Middle East and Africa there is a broad choice for investors, according to Michael Rhydderch, head of EMEA Capital Markets, Cushman & Wakefield. ‘In Europe, low risk investors will continue to have a wider choice of markets than they realise with the focus on Germany and the Nordics, particularly for retail. France and the UK are perhaps a little riskier now with slower economic growth and more recent property price appreciation but they offer good medium term growth and higher return potential in development and refurbishment in London and Paris,’ he explained.

‘Elsewhere, Poland is an easy pick to make but a crowded market to buy in and one that really has to be seen as more core than value add these days. Indeed, for those seeking higher returns, they will need to look towards the fringe with Russia a very exciting market at present and Turkey set to perform well, or towards what are currently less favoured segments of the market,’ he pointed out.
‘In particular investors need to look at where distress is likely to emerge but can be married with attractive long term fundamentals be that from repositioning retail space in a range of markets, from an undersupply of modern retail or offices in some Italian cities or a shortage of modern logistics to rent in Spain and Portugal,’ he added.

Article from http://www.propertywire.com/news/north-america/americas-property-investment-recovery-201203196314.html